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Avoiding A Headlong Lurch into Unfettered Capitalism

By Dilip Hiro, IPS, 9 October 1998

LONDON, Oct 9 (IPS) - When Russian President Boris Yeltsin finally undertakes his deferred official visit, centred primarily around economic cooperation, to Kazakhstan and Uzbekistan Sunday, the economies of adjoining Central Asian countries will provide a study in contrasts.

Kazakhstan is experiencing unprecedented economic difficulties, whereas Uzbekistan is not.

Kazakhstan followed Russia's example of a headlong rush into unfettered capitalism, accompanied by free access to foreign companies and the sale of natural resources and vast state enterprises to a few individuals at bargain-basement prices.

In contrast, guided by President Islam Karimov, Uzbekistan has adopted a gradualist approach to the transition from a centralised, command economy to a market economy, and intends to maintain a mixed economy for several years.

Judging by the acute financial crisis that has gripped Russia since August, and the less acute problems looming in Kazakhstan, Karimov can claim, rightly, that he has been following the correct policy since independence eight years ago.

"The Uzbeks feel vindicated," said one western investor in the Uzbek capital, Tashkent. "The Russian collapse brings into question the whole argument for a market economy as the Uzbek government equates what has happened in Russia with the market economy."

Moscow-based reporters for state-run Uzbek television have been busily beaming images of panic from Russia, thus providing evidence in favour of the Uzbek government's policies.

"If a country is not integrated into the world financial system, if there is no foreign exposure on the Uzbek treasury bills, foreign exchange or share markets, then obviously it will not be affected," a western economist based in Moscow said.

Even before the recent meltdown in Russia, the figures released by the United Nations Commission for Europe in July showed how much better Uzbekistan (population, 24 million) was doing, compared to Kazakhstan (population, 16 million) and Russia (population 148 million).

Using the 1989 figure as a base of 100, Russia's GDP in 1996 was down to 57, Kazakhstan's was 61, and Uzbekistan's 82. The statistics for industrial output were even more favourable for Uzbekistan (108), with Kazakhstan at 48 and Russia at 47.

Part of the reason for this lies in the fact that Uzbekistan lacked any military industry, which became a victim of the end of the Cold War.

Disregarding the advice of the International Monetary Fund (IMF) to throw open its markets to foreign capital, and make its currency freely convertible, the Uzbek government has opened its industry slowly and partially to foreign investors, controlled the outflow of capital, and pursued a policy of curtailing industrial imports by encouraging production at home.

Uzbekistan, which launched its own currency, the sum, in November 1993, has followed a gradualist policy, promising to make it fully convertible in 2000. It has maintained strict exchange controls, permitting only a few foreign firms to repatriate their profits.

As for its own citizens, the administration allows them to open hard currency bank accounts only with the National Bank of Foreign Activity.

The government plays an important role in the economy, especially in the cotton sector (popularly referred to as "white gold"). The crops are grown largely on land owned by the state or by co-operatives. State control extends to fixing the price for cotton and exercising an export monopoly.

Since four-fifths of the cotton is exported, the government benefits materially and also in terms of building up its hard currency earnings. In 1997 cotton exports of three million tonnes provided Uzbekistan with 1.6 billion, about a third of its total hard currency earnings. It also made Uzbekistan the second largest exporter of cotton in the world.

For all these reasons Uzbekistan found itself almost free from the economic troubles that engulfed Russia in August.

Almost free, but not totally. For one-fifth of Uzbekistan's imports come from Russia, while the same proportion of its exports go in the opposite direction. Following the financial crises in Moscow, the black market rate for the Uzbek currency fell from 190 sum to the dollar to 230.

But this was a minor blip compared to what happened to Kazakhstan. In the aftermath of the financial turmoil in Moscow, which raised the cost of borrowing on capital markets for the emerging economies, Kazakhstan was forced to cancel its plans to issue up to 450 million dollars worth of Eurobonds.

Earlier it had postponed plans for issuing three- and five-year domestic treasury bonds.

"Investors are not taking the risk of investing in our state's finances for longer than three to six months," conceded Daniyar Abulgazin, the deputy finance minister.

In September Standard and Poor's, the international credit rating institution, lowered Kazakhstan's long-term loan rating from BB-plus to BB-minus, and its foreign currency rating from BB- minus to B-plus.

"The Russian financial crisis represents a serious threat to the welfare of our state," said Akezhan Kazhegeldin, a senior economic adviser to President Nursultan Nazarbayev. "The recent ratings downgrading could complicate borrowing in the world markets. As a result, depreciation (of our assets) will be imported, and inflation will be imported."

Kazhegeldin outlined the problem for Kazakhstan in stark terms in the light of events in Russia. "First of all, there is fright among investors because of the Russian crisis; and what is worse, the fear of default which has happened on the part of Russia."

Faced with lower than expected foreign currency earnings due to the depressed prices of commodities like petroleum and metals that Kazakhstan exports, and a shortfall in domestic revenue due to delayed privatisation schemes, the government has decided to curtail the state budget by 750 million dollars for the rest of the financial year. This can only slow the economy down even further.

However, Russia remains Kazakhstan's single most important trading partner. And now that both economies are crippled, they are more likely to cooperate closely than before. Indeed the Kazakh and Russian presidents are expected to sign a number of economic cooperation agreements, the most important being in the oil and gas sector.

One of these involves Kazakhstan purchasing natural gas from the Russian region of Tyumen, 300 km north of the Kazakh-Russian frontier, for supplies to the northern region of Kazhakstan.

Addressing the parliament's opening session on Sep 30, President Nazarbayev announced that he was also setting up a group of Central Bank representatives to ensure that the private banks did not suffer the kind of losses experienced in Russia.

He vowed to continue the tight monetary policy recommended by the IMF, and to monitor the inflow and outflow of foreign capital. The Kazakh leader also promised to improve the tax-collecting machinery, and assist more widespread private ownership of land.

Origin: Manila/UZBEKISTAN/

[c] 1998, InterPress Third World News Agency (IPS)
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